JOURNALS OF ROBERT MAAS

Friday, February 21, 2014

TACKLING MARKETED TAX AVOIDANCE

BLOG 145

TACKLING MARKETED TAX AVOIDANCE

I was intrigued by the Foreward of David Gauke MP, the
Financial Secretary to the Treasury, to the above Consultation document. He appears to have taken to heart Humpty
Dumpty’s well known maxim that “When I use a word, it means just what I choose
it to mean – neither more nor less”.
David thinks that “the behaviour of a small minority … undermines the
honesty of the majority”. It would be
interesting to know if he has any basis for such an astounding statement. Astounding because honesty, as I understand
the word, denotes a code of personal morality.
I am honest because I believe that is the basis of the moral code to
which I adhere. If someone burgles my
house, the fact that he has committed a crime of which I am the victim will not
make me disbelieve in honesty. I will
not say to myself that because that person is dishonest, I should abandon
honesty.

I know that there are people who are dishonest when it comes
to paying tax. They do not declare all,
or in some cases any, of their income. I
am over 70 and I have know that, at least since I started in tax about 50 years
ago. But at no time in that 50 years has
my knowledge that tax fraud exists made me wish to be dishonest myself.

I also know that some honest people don’t like to pay tax
and seek legal means to minimise the amount they owe the Exchequer. Indeed, I think that most people don’t like
paying tax and most would seek to minimise the amount they owe the
Exchequer. Unfortunately, because they
receive the majority of their income under PAYE, the opportunities to minimise
their tax are very limited. But that
does not mean that most would not do so if they could. As my secretary said to me in relation to the
Jimmy Carr exposure, “If I had the choice between paying 4% or 40%, I would pay
only 4%; who wouldn’t!”. She didn’t say,
“If Mr Carr can find a way to only pay 4%, I will seek to commit tax fraud
(i.e. I will become dishonest). What
sort of world is it that Mr Gauke inhabits if he seriously believes that
anyone, let alone the majority of people, are likely to become dishonest if
they see a small minority of people avoiding tax? It is certainly not the world that I and my
friends inhabit.

Personally I would have thought that if the honesty of the
majority of people is conditional on others adopting a particular moral stance,
they would have turned to dishonesty at the time of the MPs expenses
scandal. If you see a person who earns
getting on for three times the average national wage making a massive tax-free
profit on a house bought on the back of a huge subsidy by the taxpaying public
(by way of paying his mortgage interest), and who is entitled under the laws
that he and his colleagues have passed to claim tax-free expenses that he and
his colleagues have decreed are taxable if paid by an employer to an employee
in a similar situation, you would surely have abandoned the principle of
honesty long ago if you regarded it as such a fragile precept.

Mr Gauke goes on to say that the government has taken
significant strides to make the UK’s tax system one of the most modern and
competitive in the world and, to maintain the integrity of this system, “it
must apply fairly and consistently to everyone”. Leaving aside the fact that many people (not
including me, I hasten to say) believe that his “most modern and competitive”
system is in fact scandalous as it exempts large US corporations operating in
this country from paying tax here, shouldn’t “fairly and consistently” mean
that it operates in the same manner for rich and poor? That both can expect to be able to plan their
affairs on the basis that the tax law means what it says – or at least what the
courts interpret it to mean. But that is
not actually what Mr Gauke wants. He
wants the law to apply unequally. He
wants some people to say to themselves, “Although this is what the law says, I
think that parliament didn’t get it right as it creates a tax deduction for me
and accordingly I should ignore it and make a guess at what parliament would
have legislated if it had had my transaction in front of it”, whereas he wants
others to follow the law as written.
What that has to do with consistency is anyone’s guess.

He goes on to explain that the consultation is about “a new
measure to require taxpayers to pay the tax they owe if they have used the same
avoidance scheme (or a similar scheme) as one which a Court or Tribunal has
already ruled against”. There are two
worrying assumptions there.

Firstly courts do not rule for or against tax schemes. They consider the appeal made by a taxpayer
and determine whether that particular taxpayer has displaced the assumptions
made by HMRC when they make an assessment, amend a self-assessment or refuse a
claim. There are lots of reasons why a
court might rule against a taxpayer. It
might decide that his interpretation of legislation is incorrect. It might decide that transactions the
taxpayer has entered into do not have the effect the taxpayer believed them to
have. It might decide that a transaction
is a sham. It might decide that the
facts do not reflect what the taxpayer purported to have happened. It might decide that construction placed on a
document is incompatible with a non-tax area of the law. Accordingly the fact that A uses the same
avoidance scheme as B, does not mean that a court will reach the same decision
if asked to consider A’s tax position.
Even if everything else is identical, a court is largely influenced by
the arguments put before it – if it were otherwise it is hard to see why a
professional Bar should have developed – and the arguments that A wishes to put
before the court may differ from those B used, or if presented in a different
manner might be perceived differently by the court.

If A has simply used a “similar scheme” to B I find it
impossible to draw any conclusions as to what is likely to happen with A’s tax
position from B’s failure to convince the courts in relation to a different
transaction. Where, as in this case, it
is HMRC, not the courts, that decide whether or not the schemes (or, perhaps
more accurately, serious of transactions that HMRC have labelled as a scheme)
are similar, the fundamental concept that a person is entitled to be taxed in
accordance with the law, not at the whim of a government official, seems
seriously at risk.

My second problem is that even if the courts have found that
B’s scheme is ineffective, I cannot see how A “owes” tax, when his own case has
yet to he heard by the courts. Until
that has happened, he surely owes nothing.
Indeed, he owes nothing even if the law requires him to pay the tax that
HMRC perceives to be due as a condition of appealing at all (as applies to VAT)
or as a condition of continuing to pursue his appeal (as applies to an appeal
from the FTT).

If Ministers who have come through the English education
system are incapable of using the English language in the manner that is
generally accepted, no wonder that so many people question the effectiveness of
that system.

Wednesday, February 19, 2014

CAN THE LAW FORCE YOU TO LIE?

BLOG 144

CAN THE LAW FORCE
YOU TO LIE?

Well, George
Osborne and David Gauke apparently think so!
Because this is the statutory procedure that they propose in the draft
legislation included with the consultation document, “Tackling marketed tax
avoidance”. Of course it doesn’t come
out and say, “You must lie”. But that is
the effect.

The proposal
is that if HMRC open an enquiry on a tax return that includes a claim for
relief arising from the use of a tax avoidance scheme, HMRC should be able to
require the tax to be paid on account if someone else has lost a tax appeal and
HMRC think that their case is “relevant” to yours. This means that HMRC think that if that
decision was applied to what you have done, you would lose your case.

The
procedure is they issue you with a notice telling you what the Court or
Tribunal decision was and explaining why they think the decision will mean that
your case will fail. They do not need to
wait until the decision is published, so you may well not know on what basis
that other taxpayer’s claim failed or even whether the arguments you want to raise
in your case were considered by the Court.
But that is simply unfair and unreasonable. It does not force you to lie.

What does is
the next bit. You must either confirm to
HMRC that you accept that the ruling in the other case is relevant to yours or
must make representations to HMRC as to why you disagree that it is relevant to
yours. Obviously you will make
representations if you disagree. HMRC
must then consider your representations and, if they do not agree with your
view, notify you that they still consider that the decision is relevant to your
case.

On receipt
of that notice you must then give a notice to HMRC stating that you accept that
the decision in the other case is relevant to yours.

But, by
definition, you don’t accept that, or you wouldn’t have made representations to
HMRC. You must therefore either lie and
write to HMRC saying that you agree to a situation with which you in fact
disagree, or break the law because the law requires you to make such a
declaration irrespective of whether it is true or not.

If you
decide that your integrity is sufficiently important that you are prepared to
break what is clearly an unjust law – because requiring a taxpayer to lie is
obviously contrary to justice – you become liable to a penalty of X% of the tax
that in HMRC’s view you will owe if you lose your case. You will have to pay it even if ultimately
you are right; you take your case to appeal and win. The government has not yet indicated what
percentage the X% will be.

This is
going to be a strong test of a taxpayer’s integrity. If the amount of the penalty is, say, 1% of
£100,000, most people would not lie to save £1,000. However if it is 20% of £100,000, would you
lie to save £20,000?

Did you vote
to elect a government that would force you into such a moral dilemma? If so, would you do so again in the knowledge
that Mr Osborne believes it proper to put taxpayers into such an unenviable
positon?